Lenders are 'ready for negative interest rates'

THE Central Bank believes Irish banks when they say that they are operationally ready to handle any challenges that would come with an expected move by the European Central Bank to charge lenders who keep money on deposit.

THE Central Bank believes Irish banks when they say that they are operationally ready to handle any challenges that would come with an expected move by the European Central Bank to charge lenders who keep money on deposit.

The ECB is expected to announce on Thursday that it will apply a 'negative deposit rate' for money placed with the central bank overnight in a bid to convince banks to lend the money out instead.

"If you borrow at 25 basis points now and you're returning the cash at zero... then economically you're no different," said the head of money markets at one eurozone bank. "The key thing is the margin you're getting for the money. The bigger issue is the operational impact."

Banks' systems have not traditionally been set up to deal with negative cash flows from money on deposit, but the banker said the fact that the ECB bad been alluding to negative rates for more than a year had given banks time to prepare.

"Lots of banks would have testing done to see if they're operationally prepared," he said, adding that his institution was asked to prove to its regulator that its systems were ready to handle negative rates.

In almost-identical statements, central banks from Ireland, Austria, Portugal and Slovakia said their commercial banks were operationally ready to handle negative interest rates, pointing out that the ECB had been publicly discussing the possibility of negative interest rates for some time now.

Germany's Bundesbank and financial regulator Bafin said all banks were asked at the end of last year if they were able to handle negative interest rates. All were either able to do so or soon would be.

Luxembourg and Latvia's central banks said they had not asked banks to prepare themselves to handle negative deposit rates. Finland's said the issue was "non-topical".

Central banks in Estonia, France, Holland and Spain declined to comment. The seven other eurozone countries' central banks did not respond. (Reuters)